ABSTRACT

We estimate private benefits of control in 39 countries using 393 controlling blocks sales. On average the value of control is 14 percent, but in some countries can be as low as –4 percent, in others as high a +65 percent. As predicted by theory, higher private benefits of control are associated with less developed capital markets, more concentrated ownership, and more privately negotiated privatizations. We also analyze what institutions are most important in curbing private benefits. We find evidence for both legal and extra-legal mechanisms. In a multivariate analysis, however, media pressure and tax enforcement seem to be the dominating factors.

The reason why a superior voting share trades at a premium is that its holder expects to receive a differential premium (see Zingales (1995b)). Hence, if a potential buyer is not willing to pay any more for control, the premium disappears.

3

We thank the referee for pointing out this bias.

4

We have also explored the robustness of our results if we were to further restrict this criterion and exclude deals where block is less than 15 percent. The results are unchanged although we lose some countries as a result of a lack of observations.

5

We only include countries in our analysis if there were two or more transactions over our sample period. The final sample is based on all of the data available over the 10-year sample period for every country aside from the U.S. For the U.S., there were many more potential observations and we limited ourselves to an initial sample based on the first 20 transactions for each calendar year over our 10-year sample period that met our sample selection criteria.

6

With an average controlling block size of 37 percent, the maximum downward bias, on average, in our sample of 2.2 percent if the seller has no bargaining power and there is no bias if sellers have all the bargaining power.

7

While λ is constrained to be fixed across countries, the term α(Yb−Ys) does differ across deals (and a fortiori across countries). Thus, the adjustment introduced in column 2 could alter the relative ranking across countries.

8

Summary statistics for the characteristics of the deals that we use later in our empirical analysis are provided in our earlier working paper, Dyck and Zingales (2002a).

9

In Canada and Australia we used 15 percent since exceeding 20 percent would trigger a mandatory offer for remaining shares.

10

An alternative approach to identify the likelihood that a stake brings control is to calculate a Shapley value associated with control. Unfortunately, we were not able to collect information on a consistent basis on the ownership status of other shareholders. For example, some countries might report the presence of all shareholders with stakes that exceed 5 percent while other countries might only report holdings that exceed 10 percent or higher.

11

While other measures of cash flow are preferable, earnings per share is one of the few data items consistently reported in Datastream for the companies in our database.

Since we have enough observations for the U.S. (46), we can assess the realism of our assumption by estimating the same specification restricted to U.S. data. While the other coefficients are very similar to the ones reported in Table IV, the coefficient of the majority block dummy is small and insignificant. “Imposing” to the U.S. the same majority dummy effect as other countries, thus, will distort its average level of private benefits upward.

14

We derive U.S. measures in a two-step procedure. First, we computed the average ratio of fixed assets (property plant and equipment) to total assets for all companies that in each three-digit SIC-code for the period 1990 to 1999. Then we took the median value across all companies. We then impute this value for all of the companies in our sample.

15

A rational bidder knows that if he bids his valuation he will overpay, the more so the more uncertainty there is about the fundamental value of the asset. Thus, the more uncertainty there is, the more he will shade his bid.

16

This is the prediction that Doidge (2002) tests using companies with differential voting stock. He finds that the voting premium of companies cross listed in the United States is significantly lower. This is consistent with our findings and an additional confirmation that different methods lead to the same answer: private benefits exist and are important.

17

If we exclude Brazil, as we should for reasons to be discussed in Section III.G., the correlation increases to 0.69 using the raw data and 0.86 using the refined data.

18

Using differential voting shares to estimate the value of control can induce also another bias. When ownership is highly concentrated, the price of voting shares tends to underestimate the value of votes, because control is securely held in the hands of the largest shareholder. There is some weak evidence this might be the case if we use Nenova's (2001a) raw estimates. Nenova, however, is aware of this problem and in her regressions she controls for ownership concentration. Consistently, her refined measure seems completely unaffected by this bias.

19

Her approach, albeit very similar, is not strictly comparable with our own, as she uses the price on the date of sale and compares the sale price with the price of voting shares on the exchange.

20

This sample only includes transaction where sale price is cash. That is, we excluded privatizations where sale price could include so-called “privatization currencies” that included government debt that was trading at a discount.

21

They identified 12 transactions where the stake sold was 19.26 percent, which we excluded because this level was below our selection criteria, but in Brazil accounted for 50.1 percent of the voting shares in the company. In addition, they were able to identify stock market prices for a number of firms that we were not able to collect using Datastream or were not identified by SDC.

22

The p-value for the equality of the two means is only 21 percent, but this is not surprising given we have only six observations before and two afterward.

Similar results obtain if we follow La Porta et al. (1997) and include GDP growth to capture future growth prospects and log GDP to capture any economies of scale in financial development.

26

While public opinion pressure is likely to act as a restrain in the extraction of private benefits, it does not necessarily push managers in the direction of shareholders' value maximization. In fact, in Dyck and Zingales (2002b) we show that media pressure also induces companies to be more environmentally conscious even if this does not necessarily benefit shareholders.

27

Tax authorities should be particularly concerned about diversions of revenues from taxed to nontaxed entities, be those entities domestic or foreign.

28

For example, Gresik's (2001) recent review of the literature on rationales for and effects of corporate income taxation in the context of transnationals does not mention any spillovers between government actions and agency costs.

29

In Dyck and Zingales (2002b), we study the determinants of newspapers' diffusion. We find that the type of dominant religion and the degree of ethnolinguistic fractionalization explain 41 percent of the variation in press diffusion. When we use these as instruments for press diffusion, the results are unchanged.

30

For Australia and Canada we used a 15 percent cutoff due to the presence of takeover rules for stakes exceeding 20 percent.

We attempted to access additional information sources for price information for local stocks not covered during our time period by Datastream through direct contacts with country stock exchanges and through appealing to news reports that often reported share price information for large local companies. These efforts produced 26 additional observations.

Dyck, I.J. Alexander, and Luigi Zingales, 2002b, The corporate governance role of the media, in RoumeenIslam, ed.: The Right to Tell: The Role of Mass Media in Economic Development, Chap. 7 ( The World Bank , Washington ).

Dyck, I.J. Alexander, and Luigi Zingales, 2003, The bubble and the media, in PeterCornelius, and BruceKogut, eds.: Corporate Governance and Capital Flows in a Global Economy, Chap. 7 (Oxford University Press, New York ).

Megginson, William L., Robert C. Nash, Jeffrey M. Netter, and Annette B. Poulsen, 2000, The choice between private and public markets: Evidence from privatizations, Working paper, University of Georgia .

Milgrom, Paul, and Robert Weber, 1982, A theory of auctions and competitive bidding, Econometrica50, 1089–1122.